On Oct. 4, the Consumer Financial Protection Bureau (CFPB) widened its reach into the short-term, small-dollar lending market when it finalized its payday lending rule.
Payday or small-dollar loans, often termed “fringe financial services,” provide quick money to cash-strapped borrowers who might be living paycheck to paycheck, in exchange for high fees and interest rates.
As a result, borrowers are often unable to pay the fee and are forced to roll it into a new short-term loan, creating what CFPB calls a “debt trap.”
Credit unions, in stark contrast to most payday lenders, have a long-standing history of helping their members in need and at a much lower cost. A strong example of this is the Payday Alternative Loan (PAL) program, which permits federal credit unions to make small-dollar loans that are significantly less expensive for consumers than traditional payday loans. NCUA determined that PALs provide members with a safe, more affordable credit product, and there was significant concern that CFPB’s new payday-loan rule would limit a credit union’s ability to offer this product.
Luckily, the rule provides a safe harbor for loans made in accordance with NCUA’s PAL program. This makes the bureau’s new rule significantly less burdensome for credit unions.
Still, credit unions need to be mindful of the rule’s requirements and when they might apply.
Which loans are exempt?
In addition to the exemption for PALs originated by a federal credit union, Section 1041.3(e) of the rule exempts “alternative loans” made by any lender (not just federal credit unions), provided that the loan has the following terms:
An alternative loan is conditionally exempt from most of the rule’s requirements. The credit union must review the borrower’s history and determine that the extension of the alternative loan would not result in the borrower being indebted on more than three outstanding alternative loans within a 180-day period.
Also, the credit union cannot make more than one alternative loan to a single member at a time, and the credit union must maintain and comply with policies and procedures for documenting proof of the borrower’s recurring income.
The rule also specifically exempts automobile purchase loans, home mortgages, credit cards, student loans, overdraft services, and salary advance programs from coverage.
NEXT: What types of loans are covered?